Fees matter. One of the things the introduction of KiwiSaver was supposed to do was to make managed funds more transparent and competitive. Disclosure requirements are now in force which means that all KiwiSaver funds have to disclose their fees uniformly as a total expense ratio and so investors are able to easily compare the cost for each different fund. However, even now, fees for funds still vary greatly.

At first glance, the fee that a fund charges may look quite small: 1 per cent does not seem much to pay. However, you can look at this 1 per cent fee in another way: supposing a fund is getting returns of 5 per cent, your returns after the 1 per cent fee are reduced to 4 per cent. The fund manager has taken one-fifth of the returns.

The fee may be just 1 per cent of the money that the manager is investing for you, but that makes up 20 per cent of the returns that are being achieved.

Last week research house Morningstar, came out with its quarterly KiwiSaver survey. This should be required reading for anyone who has a KiwiSaver account (it is available free at www.morningstar.co.nz).

The June survey shows that although fees are now transparent and easily comparable, the difference in fees between the funds is immense. For example, Morningstar's survey shows that in the Growth fund category, the most expensive fund manager, Staples Rodway, charges a fee of 1.71 per cent, while the cheapest, ASB, charges 0.66 per cent. That means that Staples Rodway costs two and a half times more than ASB.

That 1.71 per cent to 0.66 per cent is a very wide range. There are few other things that we would buy which would have a price range as wide as this (a mobile phone provider that charged two and a half times its competitor's price would soon go out of business), I am left with the conclusion that either KiwiSaver funds costs have been opaque or that KiwiSavers have simply not cared much about what they pay. Maybe it is a combination of both.

It seems to me that such a wide range of fees is a sure sign of market inefficiency. I suspect that a lot of KiwiSavers are first-time investors and have given fees little consideration. Although fees matter, they are not everything - I do not mind paying for something when I get value. As an investor I care about the total return that I will get after fees and if the expensive provider is getting me superior returns I know I am receiving value for money.

However, as Morningstar notes in its survey, high fees do not necessarily translate into good returns. This is certainly the case with the Growth category of KiwiSaver funds. When we look at the cheapest Growth KiwiSaver provider, we see that ASB had five year returns of 10.7 per cent and were 11th out of 24 in the category. However, the most expensive fund had five year returns of 8.8 per cent and was 21st out of 24 Growth funds. That is poor value for money.

My guess is that this is probably causative - Staples Rodway has below average returns because it has high fees. In fact, it is possible that Staples Rodway is a reasonable fund manager, but its fees take such a chunk out of the returns, it simply could not be up with the average let alone the leaders.

Of course you do see fund managers who charge heavily but who add value. An example of this is Milford Asset Management in the Balanced fund category. According to Morningstar's survey, Milford is the most expensive fund in this area (1.48 per cent against a median of 1.03 per cent). However, Milford earns its higher fees and, over the last three years has been the best performer in the category. Fees are fine - if there is good performance.

Milford proves that you can get good returns even though fees are high. Nevertheless, look at Morningstar's survey and you will see a wide range of fees in each fund category - there are plenty of funds who charge high fees but do not deliver.

We will continue to see this wide range of KiwiSaver fees until such time as investors start to vote with their feet. The fee disclosure regime is relatively new and I hope that people will soon start to abandon the funds with high fees which come with low performance.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.